Motorcycle diary reflects US reality

Neil Irwin

Hog in the limelight: Harley-Davidson's bottom line is good for shareholders but bad for workers.

Harley-Davidson is more than just an iconic American brand. It is also a surprisingly good reflection of the forces shaping the US economy as a whole. The motorcycle company reported its fourth-quarter earnings last week, and the details show a company that is as typically American as the roaring sound of a Hog on the highway.

Here are the five ways the company's financial results explain the forces shaping the US economy.

■ Coming back - but not all the way: Harley-Davidson shipped 247,625 motorcycles in 2012, up 6.2 per cent from 2011 (that's an extra 14,508 motorcycles out the door). The company forecasts a similar gain in 2013.

That is up handily from the recent past: the company shipped only 223,023 motorcycles in 2009, as the steep global downturn meant consumers were in no shape to spend tens of thousands of dollars on a motorcycle. But while the gains since then have been decent, it's worth remembering that Harley - and the US economy as a whole - is nowhere near its potential.

In 2006, the company shipped a whopping 349,196 motorcycles. In other words, it would take much stronger growth for Harley-Davidson's production to return to the track it was on before the recession. The same is true of the US economy as a whole: economic output in 2012 was close to $1 trillion below the level the Congressional Budget Office estimates as the economy's potential. The missing motorcycles are part of that ''output gap''.

■ Changing consumer demographics: The drivers of US consumer spending are more diverse, which can be a challenge for companies that are strongest among middle-aged whites.

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Harley is dealing with that by pushing particularly hard on what it calls ''outreach'' segments of the market, as opposed to the ''core customers'', who have traditionally bought the company's motorcycles.

As the chief executive of Harley-Davidson, Keith Wandell, explained in an October conference call with analysts, the growth in sales to young adults, women, African Americans and Hispanics was going gangbusters. ''In fact, through nine months, sales to outreach customers grew at nearly twice the rate as sales to core riders, thus ensuring new riders coming into the Harley-Davidson family,'' Wandell said. If the Republican Party had been as successful at expanding its appeal beyond middle-aged white men as Harley-Davidson, Mitt Romney would be president right now.

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■ Households using debt more responsibly: Harley-Davidson has a finance arm that offers loans for the purchase of its bikes, and such loans were part of the vast expansion of household debt leading up to 2007 and the wave of defaults since then.

But Harley's data fits a broader story in the US economy: households are becoming more responsible with debt. In 2007, before the global financial crisis, Harley's ''annual loss experience'' on motorcycle loans - how much of each dollar lent had to be written down because the buyer couldn't pay - was 1.91 per cent. It spiked to 2.86 per cent during the recession. Now it has fallen far below its pre-crisis levels to 0.79 per cent, which is the lowest in a decade. Executives in a conference call described it as a key positive surprise for the year. Only 3.94 per cent of outstanding loans were more than 30 days delinquent on payments this year, compared with 6.15 per cent before the GFC.

Translation: people borrowing to buy motorcycles are more cautious than in the pre-crisis days. It's hard to know for sure how much of this is due to higher lending standards and how much to Americans' wariness of taking on too much debt, but either way it is a healthy sign that household debt is not the problem weighing on Americans it was in the not-too-distant past.

■ Exports are the key to growth: There is a widespread notion that the world doesn't want to buy American products. It isn't backed up by the data - and Harley-Davidson is a prime example.

The US remains the company's biggest market but growth is coming from abroad, particularly emerging markets. Shipments of motorcycles in the US were up 6.6 per cent, up 2.3 per cent to Japan, and down 5.9 per cent to recession-stricken Europe. But the emerging middle class of Asia and Latin America can't seem to get enough Harleys. Sales in Asia outside Japan rose 25.6 per cent, and Latin American sales rose a whopping 39 per cent.

Those are off small bases, but it shows how a company such as Harley-Davidson can keep expanding amid slow growth in the US and other developed economies.

■ Doing more with fewer workers: Rising productivity is the key to rising wealth in the long term, but during short periods, it is part of the story of high unemployment.

Harley-Davidson has had great success building more motorcycles with fewer people. The company started 2012 with 6000 employees in its motorcycle division, who shipped 247,625 units. That works out to more than 41 motorcycles produced per worker.

Compare that with a decade ago. The company started 2002 with 8100 workers, who produced 263,653 units. That's 33 motorcycles per worker.

In other words, the company is making pretty much the same volume of output as it did a decade ago, but is doing it with 2100 fewer employees.

That is great for shareholders. Someone who bought Harley-Davidson stock at the end of 2002 and reinvested dividends since then has earned more than 33 per cent on their money during the past decade, despite a catastrophic financial crisis in that period.

It is not so great for workers. Harley's ability to produce the same output with so many fewer workers is America's middle-class jobs crisis in a nutshell.